Appendix A: How Customer Managers Budget Capital Expenditures


Overview

When a capital expenditure is proposed, the project must be evaluated and the economic consequences of the commitment of funds determined before referring it to a budget committee for review or to management for approval. How are the economic consequences described best? This is done in two steps:

First, set up the project in a standard economic model that can be used for all projects, no matter how dissimilar to each other they may be.

Benefits - costs = cash flow

To describe the formula in accounting terminology:

Benefits:

Projected cash revenue from sales and other sources

Costs:

Nonrecurring cash outlays for assets, plus recurring operating expenses

Cash flow:

Net income after taxes plus noncash charges for such items as depreciation

Thus, if the model were stated in a conventional accounting form, it would appear as:

Add:

Cash revenues projected (benefits)

Less:

Cash investment outlay and cash expenses (costs)

Total:

Cash flow

The "benefits less costs" model is usually developed within the framework of the company's accounts and supported with prescribed supplementary schedules that show the basis of the projection.




Consultative Selling(c) The Hanan Formula for High-Margin Sales at High Levels
Consultative Selling: The Hanan Formula for High-Margin Sales at High Levels
ISBN: 081447215X
EAN: 2147483647
Year: 2003
Pages: 105
Authors: Mack Hanan

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